Healthy Skepticism Library item: 1575

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Publication type: Journal Article

Blumenstyk G.
Universities Fear a California Ruling Could Set a Precedent, Leaving Them Liable for Research Sponsors' Lost Profits
Chronicle of Higher Education 2005 May 6;

Full text:

A California appeals court has ruled that the University of Southern California could be held liable for a company’s lost profits as a result of the institution’s delays and errors in its management of a clinical trial paid for by the company.

Now several higher-education organizations and other universities have joined Southern California in asking the State Supreme Court to step in and overturn that ruling, saying that it could create a precedent that could expose research universities to “outlandish claims” of lost profits from sponsors of research.

Lawyers for the American Council on Education, the Association of American Universities, and the National Association of State Universities and Land-Grant Colleges make that argument in a letter urging the Supreme Court to accept Southern Cal’s petition to hear the case. The three organizations say the February ruling by the California Court of Appeal in Los Angeles is apparently the first in American legal history to find that a university could be “liable to its research sponsor for ‘lost profits’ related to the quality or administration of university research.”

The California Institute of Technology, Stanford University, and the Council on Government Relations, a group in Washington, D.C., that represents the interests of research universities, have also written letters urging the Supreme Court to take the case and overturn the ruling.

Universities “are terrified by it,” said Kelly J. Bendell, university counsel at Southern California. Under the appellate court’s ruling, she said, if research sponsors “don’t like the results, or the report is a couple of months late, you’re going to be on the hook.”

But a lawyer for the company that sued Southern Cal said the universities and organizations are overreacting.

“This decision does not say that universities are necessarily liable for lost profits if they breach the agreements of a clinical trial,” said Jens Koepke, a lawyer in Los Angeles who represents Sargon Enterprises, a maker of dental implants. “It does not set any broad precedent.”

In a legal brief urging the Supreme Court not to hear the case, Sargon says that while Southern Cal “invokes images of ivy-covered walls and academic ivory towers,” the university “well understood the commercial value of the Sargon implant and sought to attach itself to, and indeed to participate in, the anticipated financial success” of the product.
According to the filings, there had been discussions of a potential donation of up to $15-million from Sargon to the university’s School of Dentistry if the product succeeded.

Mr. Koepke also noted that the ruling was unpublished, which in California means it is not intended to be cited or relied upon by other courts.

The dispute goes back almost a decade. In 1966 Sargon offered $200,000 for a five-year clinical trial of an dental implant at Southern California’s dental school, withdrew from that study after two years, and then, in 1999, sued the university, asserting that it had failed to perform the agreed-upon work properly. In March 2003 a jury ruled in Sargon’s favor and awarded it $433,000 in damages.

Ms. Bendell, a university lawyer, said Southern California had not tried to challenge that result because jury verdicts are difficult to overturn. Also, she said, Southern California actually came out ahead in the case financially because the judge had ordered Sargon to pay the university’s legal fees of $700,000. (The judge considered Southern California the prevailing party in the case because the amount of damages awarded to Sargon was less than the $500,001 the university had offered the company to settle the case.)

But Sargon appealed, arguing among other matters that the trial-court judge had erred in refusing to allow the jury to consider evidence in support of the company’s claim that Southern California should be held liable for lost profits. The company said that the university’s delays in preparing a first-year status report had impaired Sargon’s plans to market the implant overseas. The company, founded by Sargon Lazarof, a California dentist, sought up to $300-million in lost profits.

In February the appeals court agreed that that issue should have been heard and ordered the case back to the lower court for a new trial on damages for lost profits. (The appeals court also said the lower court should consider Sargon’s accusations of fraud against Southern Cal. The other universities and organizations with an interest in the case have not taken a position on that issue. Southern California says the allegations are without basis.)

Ms. Bendell said the university is concerned because if the Supreme Court does not hear the appeal and reverse the Court of Appeal’s ruling, the trial court will be considering damages based on a jury verdict that Southern Cal disputes.

She acknowledged that the university’s handling of the clinical trial was flawed. “There were some things that could have been done differently and better,” she said. But the work did not have major problems, she added.